Its true: Buying a rental property can be a great financial move. More Americans are renting than ever before, and if recent reports prove true, that number is set to climb in the coming years. A rental property can be a smart way to monetize the demographic shift away from homeownership.
But being a landlord involves more than just sitting back and waiting for the rent checks to roll in. If youre on the market for a rental property, keep these five things in mind:
- Youll Need Significant Money Up Front
As is the case with any major purchase, youll need money for a down payment. The amount will depend on the size of the building youre interested in. Getting a loan for smaller properties duplexes and triplexes might require a down payment as low as 5%. But in general its best to be prepared to put 20% down, and to show proof of ample reserves. And if youre interested in properties larger than four units, youll need commercial financing.
Another thing to keep in mind: If you dont have experience as a landlord, you cant count the income youll be making from your tenants when youre trying to qualify for a mortgage.
- You Need to Do Your Research
Before you decide to enter the market at all, do some preliminary research. Know any rental property owners? Talk to them and ask them what they would do differently, if given the chance. Schedule a meeting with your financial adviser, if you have one. Research property values and property tax figures for the area where youd like to buy. Where are properties depreciating in value? Appreciating? Dont assume that you can reverse the trend of a neighborhood.
If youve got your eye on a specific property, get as much information as possible. A city assessor can get you many of the vital facts for a structure: age, property value, property taxes, and even the most recent date of major roof repairs. If you can, ask for a copy of the current owners Schedule E, which will give you information about the profits and loss the current landlord has seen during his tenure.
- Youll Need Insurance
Insurance policies for landlords cover your property against damage from hail, fire, wind, lightning, snow, ice, and other hazards. They also cover losses or injuries your tenants might incur while on the property. As a result, landlord insurance policies are typically more expensive than homeowner policies sometimes by as much as 25%.
- Passive Income isnt Exactly Passive
Passive income is one of the most misleading terms in investing. As the owner of a rental property, your involvement with your investment will be anything but passive. Has the washing machine flooded the basement? Has the furnace given out in the dead of winter? Have weeds overgrown the yard? Are tenants filing noise complaints against each other? Guess who takes those calls.
Youll be in constant contact with your tenants in another way, too: rent payments. Youll depend on those payments, but if they come late or not at all youll have quite a bit of work on your hands.
- ...Which is Why You Might Need a Property Management Company
You might enjoy the challenge of managing your rental property on your own. But if you want a little less on your plate, you essentially have two options: hire a resident property manager to live onsite and take care of your propertys day-to-day operations, or hire a property management company to take care of everything for you. Hiring a resident manager essentially means adding more tasks, because youll be an employer in charge of his or her payroll. Property management companies, on the other hand, are typically independent contractors. Theyll charge you anywhere from 5% to15% of your rental earnings. But the peace of mind could be worth it to you. Schedule meetings and ask for quotes.
If youre considering purchasing a rental property, its crucial to arm yourself with information before making a decision. By knowing how much money it will cost you (both upfront and monthly), researching local neighborhoods, and having a plan for day-to-day management, youre well on your way to making your choice. For more information and local insight, speak with a real estate agent who specializes in rental property sales to answer any questions lingering after your research.
Sam Radbil is a contributing member of the marketing and communications team at ABODO, an online apartment marketplace. ABODO was founded in 2013 in Madison, Wisconsin. And in just three years, the company has grown to more than 30 employees, raised over $8M in outside funding and helps more than half a million renters find a new home each month.
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